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TaxWatch: New tax rule affecting eBay, Venmo and Etsy could cause ‘significant confusion,’ accountants group says

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As Congress concludes 2022 with a sprint to pass laws and a spending deal, tax accountants are joining a chorus of e-commerce companies and pay platforms who say a revamped tax form is about to cause serious confusion unless legislators make quick changes.

Without higher money thresholds to trigger the form, there could be “significant confusion in the tax system in the next several months” and the chance of exacerbating an IRS backlog “that still haunts the tax system,” the American Institute of CPAs said in a letter Friday.

The backstory is consternation over the new reporting threshold for the tax document known as Form 1099-K.

Payment platforms including eBay
EBAY,
-3.05%
,
PayPal
PYPL,
-0.73%
,
Venmo, Etsy
ETSY,
+0.28%

and others previously sent the form to both the pay recipient and the IRS once the recipient received at least $20,000 in gross payments and had more than 200 transactions.

The American Rescue Plan of 2021 lowered the reporting threshold, saying platforms had to issue the forms once gross payments exceeded $600. It just took one transaction to trigger the form, lawmakers determined.

The companies, coming together in a group called the Coalition for 1099-K Fairness, say the lower reporting thresholds will create administrative hassles for businesses and misunderstanding for millions of taxpayers.

For example, they say, the form might give a person selling personal belongings on eBay the impression they have a reportable capital gain. But they’d need to obtain the items’ initial purchase price by themselves — and if the person is selling personal property at a loss, the IRS says there’s no need to report the non-deductible loss.

Read also: Dear Tax Guy: ‘I’ve accumulated a lot of junk.’ I plan to make $6,000 selling stuff on eBay. Can I put it into an IRA instead of paying income tax?

Another issue is sifting out the reimbursements to friends and family that get beamed over these platform versus the business transactions that also take place.The law lowering the reporting thresholds said 1099-K reporting only pertained to payment for goods and services. Still, the AICPA letter said there was “significant concern” about mistakenly-sent forms to people who weren’t selling anything.

There’s also the question of what could come next if the IRS tried to match 1099-K forms it received against what taxpayers were reporting on their income taxes, the AICPA letter said. There’s “the potential to “disastrously add to the confusion and processing backlog as taxpayers seek to resolve their tax situations through correspondence,” it noted.

As of early December, the IRS had 3.1 million unprocessed tax returns, which includes 1.5 million paper returns. The IRS did not immediately respond to a request for comment.

One question is where the reporting threshold should apply if $600 is too low. The AICPA did not endorse particular legislation but said it supported one idea pegging the threshold at $5,000.

Several bills aim to increase the reporting threshold and some would completely revert to the old rules while others are at levels between $600 and $20,000. The “Cut Red Tape for Online Sales Act,” would put the threshold at $5,000. It was introduced in the Senate by Maggie Hassan, a Democrat from New Hampshire. Hassan’s office did not immediately respond to a request for comment.

On Friday, President Joe Biden signed a stopgap one-week government funding bill. That avoids a government shutdown while negotiations continue on the bigger omnibus spending bill.

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